WEST JORDAN, Utah-Citing some of the toughest auto lending competition in years, credit unions in a number of markets have found auto dealers pressing lenders to offer greater flexibility in how they pay the dealership for indirect business.
One of those payment options is buy rate financing, a practice that is coming under scrutiny from the Consumer Financial Protection Bureau (CU Journal, March 25). Credit unions that have versions of buy rate financing say they have member protections and other safeguards in place to ensure borrowers are treated fairly.
Jade Beckman, VP of consumer lending for the $3.4-billion Mountain America CU, said rate certainly is a big part of the equation, but not all of it. MACU allows dealers to get paid in two ways-a flat fee, which is a percentage of the loan amount, or a reserve. Beckman said the amount of the flat fee has been increasing among FIs in the area, reflecting what many automotive industry analysts have stated is occurring across the country (CU Journal, March 25).
The majority of CU flat fees used to be 1%, but competition is driving that figure toward 1.5% and 2%. "We call those rates super flats," said Beckman.
With dealer reserve, also known as dealer mark-up and buy rate, the dealer is allowed to mark up the FI's loan rate by a cap specified by the lender. Mountain America allows up to two percentage points.
Scrutiny From CFPB
The practice of dealer mark-up is drawing the attention of the CFPB, which has warned four large banks of potential lawsuits for alleged discriminatory lending under the Equal Credit Opportunity Act, according to published reports (Credit Union Journal, March 25). The CFPB also issued a bulletin last week saying it will be monitoring for discriminatory practices with dealer mark-up. CFPB Director Richard Cordray called on auto lenders to set controls on dealer markup, or otherwise revise dealer mark-up policies; monitor the effects of mark-up policies as part of a fair lending compliance program; and eliminate dealer discretion to mark up buy rates by compensating dealers in a different way..
Beckman said the dealers Mountain America works with do not engage in predatory lending and that MACU has close relationships with the F&I departments to make sure members are treated fairly. The CU only allows the dealer to mark up the rate on a new member who joins the credit union at the dealership.
Super flats and buy rate are now becoming the tools to compete via indirect, said Beckman. But he does not believe buy rate will be in the toolbox for any FI in the near future. "Buy rate won't be around for that much longer," said Beckman. "This time I think something will happen because the interest now is coming from the CFPB, which swings a big stick."
The $1.3-billion Westerra CU, Denver, offers what it terms as something similar to buy rate--the dealer can mark up the rate one percentage point. John McCloy, chief credit and administrative officer, said the dealer is not given a big chunk of the revenue from the higher rate, as is the case with buy rate, and instead becomes eligible for a higher flat fee. WCU also pays a flat fee via a tiered schedule based on loan amount.
What Dealers Want
But Andrew Gardner, senior director of consumer lending for Westerra, said dealers have other priorities, too.
"Dealers really want to know where they can get a loan bought; they need to have confidence in the lending institution. They want to understand the types of loans the lender will make and for them to be consistent in approvals."
Dealers also want the FI to be around when they need them, as was not the case with a large number of lenders in the Denver area, particularly banks, when the recession hit, said Gardner. "We never pulled out of the market one bit. In fact, we had a record year in 2009. That has generated a lot of loyalty from dealers."
Mountain America's Beckman shared concerns for the CU community as auto lending competition gets tougher and CUs potentially take on more risk to keep auto loans flowing. "I hope we don't forget the lessons we learned just a few years ago."
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